Proposed IRS Regulations Make Handling Forfeitures Less Burdensome
This week, the IRS issued proposed regulations regarding the use of forfeitures in qualified retirement plans, including 401(k) plans. The proposed regulations include a deadline for the use of forfeitures in defined contribution plans and clarify the purposes for which forfeitures can be used in a defined contribution plan. The regulations are proposed to apply for plan years beginning on or after January 1, 2024, but plan sponsors may rely on them in the interim.
Under the proposed regulations, forfeitures may be used, as permitted by the plan document: (1) to pay plan administrative expenses; (2) to reduce employer contributions under the plan; or (3) to increase benefits in other participants’ accounts according to plan terms. Forfeitures may also be used in lieu of employer contributions to restore accidental benefit overpayments and conditionally forfeited accounts that might otherwise require additional employer contributions
The proposed regulations require 401(k) plan sponsor to use forfeitures no later than 12 months after the end of the plan year in which the forfeitures occur. Helpfully, there is a transition rule which forfeitures incurred prior to 2024 to be treated as having occurred in the 2024 plan year. This will aid plan sponsors in applying the 12-month usage period.
To comply with these proposed regulations, plan sponsors will eventually need to amend their plan documents to account for the 12-month deadline for use of forfeiture amounts. For example, a plan which only permits forfeitures to be used for administrative expenses may run into compliance trouble if the forfeitures exceed plan expenses and there is a surplus at the end of the 12-month usage deadline.
The new 12-month deadline and clarification of forfeiture uses provide an easing of the administrative burden associated with forfeitures. Plan sponsor now have a much clearer roadmap and clock for the use of forfeitures that occur in defined contribution plans. If you have any questions about these new regulations or any other benefits question, please contact any of Graydon’s employee benefits team.